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Benjamin Eden
I use the Prescott (1975) hotels model to explain variations in price dispersion across items sold by supermarkets in Chicago. The effect of demand uncertainty on price dispersion is highly significant and quantitatively important: My estimates suggest that more than 40% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good. Temporary sales are modeled as a reaction to "unwanted inventories" that are accumulated when the realization of demand is low. The effect of demand uncertainty on the frequency of temporary sales is also highly significant and quantitatively important: Items with more demand uncertainty tend to accumulate "unwanted inventories" more often and tend to have temporary sales more often.
Keywords: Price Dispersion, Demand Uncertainty, Sequential Trade, temporary sales.
JEL: D4 - Market Structure and Pricing: General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Manuscript Received : Aug 04 2016 Manuscript Accepted : Aug 04 2016

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